Q: I came to be here from India. It is an honor to be here. What is your advice to a 20-year-old individual who wants to achieve financial freedom through investing?

Mr. Munger: Achieving success through investments has been pretty easy in my lifetime. If you were rational and disciplined, and you had a tailwind of a 10 percent per annum on average from carefully selected stocks going for you, pre tax, that was a big tailwind. If you saved your money, and you lived within your means, were shrewd and so forth, that was enough to take care of you. A little discipline in saving, and the passage of time will do it.

Now, if the world is going to get 10 percent out of indexes in the future, and I don't think it will, in real terms, getting more has proven to be quite difficult. Some of you who come along later are finding that if you stay in the big stocks, it's damn near impossible for most people. When things are damn near impossible, maybe you could stop trying.

That was not my system, but I do not recommend my system to everybody. I do, as a way of life, but I don't think all you have to do is read Charlie Munger and you'll get rich. If it were that easy, this place would be a football stadium.

[laughter]

Mr. Salzman, Daily Journal CEO: Charlie says the way to get rich is to keep $10 million in your checking account in case a good deal comes along.

Mr. Munger: By the way, that was the advice of Howard Ahmanson to a young bunch of starving graduates.

[laughter]

Rich people sometimes get a little pompous.

Q: Would you give us your thoughts on the Posco [PKX] position in the Daily Journal Portfolio?

Mr. Munger: It's a very interesting example, as a matter of fact, that shows how hard the world is. That is the most efficient steel company in the world, and it had pretty close to a local monopoly of a whole country for a long, long time. In spite of that, in spite of having some very important steel technology they have that nobody else in the world has, Posco is selling like an ordinary commoditized steel company.

It's very hard to avoid being commoditized in high powered competition in the modern world. In places like Dow Chemical [DOW], have all our complex chemical products commoditized in spite of the fact they've got thousands of PhD chemists, and people as talented and brilliant as the people who created Posco just find the markets low and the prices bad and so forth.

It shows how hard and dangerous it is to make money in a commoditized business, and how many businesses that you formerly thought were hugely advantaged can be commoditized. So, you've done a wonderful service to this meeting by raising the case of Posco. Posco's an excellent example for everybody to think about. It really shows how hard it is.

Q: You have said in the past, the private mortgage insurance solution is flawed. Can you talk about why you think the current insurance system like Fannie and Freddie works, and talk about some of the problems with bringing private capital to the mortgage insurance market?

Mr. Munger: You remember what private insurance did in the big financial crisis in the United States. Crazy and immoral, that is not a good combination. They added a third, they were deeply full of pride about the fact that they were crazy and immoral.

And so, they damn near caused a catastrophe. The people who did it have one thing in common, not one has any shame at all. I've never seen anybody who contributed to the creation of the great financial crisis with shoddy underwriting, lousy bonds -- I've never met anybody who contributed to it who was ashamed of himself. It's always somebody else's fault, or maybe the government's fault.

That's just the way it is. We've stumbled by accident, and reacted to a crisis. All the things we did were great expedients, given the terrible problems we had, and it's working after a fashion. The main risk is, given the political pressures, the government will start going crazy the way everyone did, in reducing the standards and so forth.

You keep trying to enable your citizens to vote themselves rich by various stratagems, like unlimited credit to people who don't deserve credit, which is really a dumb idea. You'd think people would know that by now, but I don't think they do. I'm satisfied with the current system provided they keep the standards up.

But of course, they don't want to do that, they want to lessen them as fast as they can, and that's what the politicians will keep urging them to do. I think it's a terrible idea. I don't think there's anything wrong with having a conservative system, like the FHA was in the Great Depression, that happened to involve the government. Letting private agencies and private insurance do as they please? We've shown how well that works, our unregulated, wonderful people in finance. I'd rather trust some pathogens.

Q: I'd like to get your thoughts on American Express [AMEX]. Do you think its moat has narrowed recently?

Mr. Munger: I don't think it was desirable that it lost its contract with Costco [COST]. Again, that's an example of what tough capitalism is. Obviously, other people are willing to do it cheaper. It just shows how tough a position that looks impregnable can be in modern capitalism. It's what makes everything difficult.

To those who already have some money, I think that's just the way it is, and American Express has had a long period of very extreme achievement and prosperity. I think they'll have a lot of prosperity in the future, but it doesn't look quite as easy as it once did. Now, the head guy would say it's always been hard, he's been battling hard, but we paddled hard here too, and what good did it do us in Daily Journal’s print business? We paddled like crazy, didn't we Gerry?

Mr. Salzman: We tried. It was hard.

Mr. Munger: Yeah, what happened is you just keep receding and receding. Welcome to adult life.

[laughter]

Q: I recently watched an Elon Musk interview on YouTube, in which he said he had lunch with you and you had given him all sorts of reasons why Tesla would fail.

[laughter]

Would you be kind enough to educate us why you thought Tesla would fail, and what BYD [ticker: BYDDF] can learn from this?

Mr. Munger: I think the auto business is very difficult, very competitive, and everybody is going to make wonderful cars. Everybody already has enormous size and wealth. So, I regarded it as a tough business. Elon Musk is a genius, and so if anybody has a chance to do it, he probably is the man.

But we have a saying at Berkshire that when a man with a reputation for genius takes on a business with a reputation for tough operating conditions, it's the reputation of the business that's likely to prevail. Without government help, getting electric cars off the ground is really hard. In China, it works a lot better than it does here, because their air is worse.

What Elon Musk really needs is for the whole country to have a disastrous smog attack that kills a lot of people. Short of something terrible like that, I think it's going to be difficult. He's a genius, but is going to have to be.

Q: I'd like to ask you how you read, and how you retain and incorporate that information? Do you have a filing system?

Mr. Munger: No, I've never taken notes; I never kept notes when I was student. I would just read what I pleased when I felt like reading it, and I think what I think when I feel like thinking it. That's my system.

[laughter]

I don't think it's the right system for everybody, but it seems to have worked well enough for to get by.

Q: My question is about so called 'robo advisors'. What are your thoughts on the subject?

Mr. Munger: The robo funds are the index funds, the big ones. You can hardly imagine more of a robo fund than an index fund. Of course, they're beating a large percentage of actively managed money over a long period of years, particularly the people who are managing billions. I just thank God that they didn't give me the assignment of managing $200 billion and beating the indexes. I would not have welcomed that challenge.

The people who still have value in investing are people who are willing to work very diligently and intelligently in less efficient markets. I think it is hard to be a great value investor with $200 billion under management. It takes a long time to buy in, a long time to sell out, other people copy your trades, it's very difficult.

Q (Phil DeMuth): Financial economists in recent years have rediscovered that highly profitable, high quality companies are better investments than other companies. They try to figure out where this idea came from, it takes them back to Buffett, and then Buffett points to Munger. But this is an insight you had in the 1950s, or maybe the early 1960s, when you were an attorney. How did you come upon this idea? You weren't even Charlie Munger then.

[laughter]

Mr. Munger: Everybody with any sense at all knows that some companies are better than others. What makes it difficult is they sell at higher prices in relation to assets, and earnings and so forth, and that takes the fun out of the game. If all you had to do was figure out which companies were better than others, an idiot could make a lot of money. But they keep raising the prices to where the odds change.

I always knew that. They were teaching my colleagues that the stock market was so efficient that nobody could beat it. But I knew people who beat the pari mutuel system in Omaha by knowing more about horses than other people. I knew it was bull. When I was young I never went near a business school so I didn’t get polluted by the craziness.

[laughter]

I never believed it. I never believed there was a talking snake in the Garden of Eden. I had a gift for recognizing twaddle, and there's nothing remarkable about it. I don't have any wonderful insights that other people don't have. I just avoided idiocy slightly more consistently than others.

Other people are trying to be smart; all I'm trying to be is non-idiotic. I've found that's all you have to do to get ahead in life, be non-idiotic and live a long time. It's harder to be non-idiotic than most people think.

Q: As chairman of a major hospital, can you speak to us about Obamacare?

Mr. Munger: That's one of the most complex subjects on Earth. Of course, the system of medical care that's evolved in the United States has much wrong with it. On the other hand, it has much that's good about it, all new drugs, the new devices, the new operations.

Medicine has taken more territory in my lifetime than it took in the whole previous history of mankind. It's just amazing what's been done, and a lot of it has been obvious and simple, like inoculating children against infantile paralysis, scraping the tartar off your teeth so you don't wear plates when you're 55 years old, so on.

People now take those benefits for granted, but I lived in the world where a lot of children died, and every city had a tuberculosis sanitarium, and half the people who got tuberculosis died. It's just amazing how well medicine has worked. On the other hand, compared to the best it can possibly be, the American system is pretty peculiar.

It's very hard to fix, because one kind of incentive is to pay so much a month for taking care of the people, and everything you save is yours. That is the system the government uses in dealing with convalescent homes. That's a great name, the ‘convalescent home’. You convalesce in Heaven; you don't convalesce in that home.

[laughter]

It's tempting to have this euphemistic name. But that creates huge incentives to delay care and keep the money, and the government has strict rules and compliance systems and so forth. If we didn't have that system, the cost of taking care of old people in convalescent homes would be ten times what it is. It was the only feasible solution.

The rest of the world is going in that direction because the costs just keep rising. If the government is going to pay A anything he wants for selling services to B, who doesn't have to pay anything? Of course that system is going to create a lot of unnecessary tests, unnecessary costs, unnecessary procedures, unnecessary interventions. Psychiatrists that keep talking to the patient forever with no improvement.

Of course that system is going to cause problems, and the alternative system also causes problems. Now, add the fact that you've got politicians, and add the fact that you've got existing players who are enormously rich and powerful, who lobby like crazy. A state legislature now, with a huge percentage of GDP going through the medical system, just imagine what the lobbying is like.

So, we get these Rube Goldberg systems, and we get a lot of abuse of various kinds. There's hardly an ethical drug company that hasn't created multiple gross abuses, which in substance go into the bribery of doctors, which of course is illegal. They’ve all committed big follies.

The device makers, if anything, have been worse. There's been a lot of abuse and craziness, and the costs, of course, just keep rising. That's in a system that averaged out as the greatest achiever in the history of the world. It's very complicated.

I think it will get addressed and we probably will end up with systems that are more like we do with the convalescent homes. If you look at medicine, what's happening is that more and more they're going to a system where they pay somebody X dollars for everything they say they need.

That system has some chance of controlling the cost. If you go into a great medical school hospital today, and you're within one day of dying of some obvious thing like advanced cancer, the admitting physician is very likely to ask for a test of your cholesterol and every other damn thing, and all the bills go to the government.

As long as incentives allow that, people will do it, and they'll rationalize their behavior. Something has to be done on that, more than is now being done. I think the drift will be more in the direction of block care. I don't see any other system that would have controlled cost in the convalescent homes.

By the way, your doctor can't just walk by every bed in the convalescent home and send the bill to the government. That's not allowed by the law. But if you transfer the patient into the hospital, you can walk by the bed five minutes every day, and send a $45 bill to the government.

If the incentives are wrong, the behavior will be wrong. I guarantee it. Not by everybody, but by enough of a percentage so that you won't like the system. I think that's enough on a subject that's so difficult. We can see where it's going. In the Netherlands, they have a system where the same people are giving a free system to everybody and a concierge system to the others. It's actually working pretty well, so that's a possibility.

Q: A question in regarding to the Asian population in the United States. A disproportionate number of us go to elite universities in the U.S., and a lot of us have upper ranked performance in school and have better jobs after school, but very few of us make it to the top of the field, especially in investing. Why do you think that is the case? What's working against us in this nation?

Mr. Munger: No, what's working against you are the laws of arithmetic. It's a strange thing, but exactly 99 percent of the people are at the bottom 99 percent. That will always be true no matter what. Of course very few people will get to the top 1 percent. In fact, only 1 percent gets there.

[laughter]

Q (Whitney Tilson): As a long time Berkshire shareholder, I was delighted to see the latest deal with the 3G guys announced last night. I understand you may not be able to comment on that specifically, but could you just talk about your experience with Heinz and with 3G and what you hope for the future? What's so special about these guys that they're able to squeeze out such extraordinary performance out of fairly stable, slow growth businesses?

Mr. Munger: Through enormous discipline, enormous will, and enormous intelligence, 3G has adopted a zero-based budgeting system which is more extreme than anybody else's. Yet they've been able to do it time after time in a way where the place ends up as strong or stronger after they've removed a lot of the cost. Of course, that's a very interesting example.

The same thing went on in the nonprofit center. When the great financial crisis came, every university I know of laid off 6 percent, 8 percent, 10 percent of their people. I know of no case where the university didn't work better after they got rid of the 10 percent. None. Zero. Successful places tend to get bloated, fat, complacent. It's the nature of human life.

Somebody who is tough enough, shrewd enough, who knows enough not to cut the wrong things and to do everything fair, has an opportunity to buy things and cut out expenses they don't really need. 3G is probably the most extreme large operation in the world doing that.

I actually think they will probably end up increasing the sales as well. What's interesting about 3G is they're teaching us something about reality: namely, that successful places contain a lot of unnecessary people...I could have told them that by observing them. If you went into the Department of Agriculture, would you have the feeling the thing was understaffed?

[laughter]

I think you'd find many a corporate headquarters going, "What in the hell are all these people doing?"

Now the Daily Journal I do not think is overstaffed. I don't think it ever has been. Gerry, what's your comment on that? He's watched it all these years. I don't think we've had a lot of unnecessary costs ever.

Mr. Salzman: We haven't had a lot of unnecessary costs. At one time, the Daily Journal by itself had approximately 300 employees. Now, we have about 150 employees. You can see that we have taken the direction of the company and reduced expenses accordingly.If you take the foreclosure business, which went from about 2006 to 2011 just like that, we added one and a half people to handle all of that additional work. When the boom went the other direction, we eliminated the one and half plus maybe a little bit more. So we tried to be ahead of the game in terms of anticipating and certainly using technology, because that's the way we were able to handle that particular sequence of events.

Mr. Munger: But, normally, if you're super successful, if the sky rains gold, everybody's president gets an assistant. Pretty soon, the assistant has an assistant. It's just the way human nature works. It's like cancer. Somebody who's really tough about that can remove a lot of costs, but only from certain kinds of companies. 3G would perish if it tried to reduce a lot of costs at the Daily Journal. They would starve to death.

[laughter]

Q: Indexing has grown a lot in the last 30 years. You once said that if we ever get to the point where everybody's indexing, it's not going to work very well.

Mr. Munger: It's far enough away from happening so that I don't spend much time thinking about it. I think human nature is such that it will never happen. I don't spend much time thinking about what is almost certain never to happen.

In the world as it is, indexing has gained a lot. It probably should have gained a lot, because it's quite rational. It's bad for a lot of people who would otherwise be earning money as stock pickers. It probably should have been bad for those people.

It doesn't make it pleasant to have it happen, any more than it helped Japan have a pleasant time when Korea came up so fast as a competitive powerhouse, and even more so when China rose. But I think indexing is here to stay.

If you stop to think about it, civilized man has always had soothsayers, shamans, faith healers, and God knows what all. The stock picking industry is four or five percent super rational, disciplined people, and the rest of them are like faith healers or shamans.

And that's just the way it is, I'm afraid. It's nice that they keep an image of being constructive, sensible people when they're really would-be faith healers. It keeps their self respect up.